The raft of European and domestic litigation surrounding Mastercard fees has been long running and frankly, brain achingly complex. Hidden in the masses of litigation, the topic has sparked little interest in insolvency practitioners. However, it has the potential to generate realisations in liquidated estates where there may otherwise be nothing to offer creditors, and it warrants attention as a result.
This article looks at how and why this will interest insolvency practitioners dealing with any insolvent business that accepted payment using a credit or debit card. Full coverage of the many years of litigation on this subject would require a book rather than a brief article given the complex and technical nature of the details, but the important recent conclusions and how they can be applied to insolvent estates are discussed here.
When businesses accept payment by a credit or debit card, behind the seemingly simple, everyday, transaction is a complex four party structure. In simplified terms, the customer buys the goods using his/her card then the issuing bank forwards payment to the retailer’s bank minus an ’interchange fee’. The retailer receives the price of the goods less the interchange fee and a fee charged by the retailer’s own bank.
The card service providers say that this interchange fee covers the costs of operating card services, security and innovation. An interchange fee can be agreed between the issuing bank and the retailer’s bank, but in practice it is usually applied multilaterally by the card service provider - it is called a ’multilateral interchange fee’, known as an MIF. As part of the card payment scheme covering Mastercard branded card transactions, which binds all banks within the Mastercard payment card scheme in the UK, the MIF was 0.9% during the period covered by the high profile litigation.
The litigation to date has involved the question of whether Mastercard’s MIFs for transactions in the UK, Ireland and the EEA between c 2006 and 2015 were anti-competitive and so in breach of UK, Irish and EU law. The argument runs that the setting of the MIF prevents negotiation of individual pricing policies and so, effectively, creates a pricing floor and restricts competition between acquiring banks.
In July 2016 the Competition Appeal Tribunal found that Mastercard’s UK MIF was indeed a restriction of competition (1241/5/7/15 (T) Sainsbury’s Supermarkets Ltd v Mastercard Incorporated & Ors); a decision that followed years of European litigation which had reached the same conclusion. The rationale for the decision was that in the absence of the MIF, issuing banks could not have deducted an interchange fee without having agreed individual pricing policies with the retailers’ banks. They would therefore have reached that agreement without the Mastercard scheme. Sainsbury’s was entitled to recover the difference between the fees paid and the amount it would have paid (hypothetically), had it agreed the interchange fees bilaterally. Sainsbury’s was awarded £69 million in damages together with compound interest.
In 2017, however, it all changed. Asda, together with a group of prominent high street retailers, took on Mastercard for round two (Asda & Ors v Mastercard  EWCH 93 (Comm)), and a different result was reached by the High Court. It ruled that the MIF was indeed prima facie anti-competitive: if the MIFs were lower or zero, the retailers’ banks could compete by offering overall charges below that floor. So far so logical … However, the High Court then accepted what was termed the ’death spiral’ argument.
This argument (which is less gripping than the name suggests) says that, in a hypothetical world with a Mastercard MIF of zero while Visa MIFs were set at their actual levels, the Mastercard payment scheme would collapse as issuing banks would switch to rival operators such as Visa, in order to maximise their revenues from the interchange.
And why did that matter? Well, if the ‘death spiral’ logic was applied, then the MIF was not anti-competitive, as in the alternative world Mastercard would have been driven out of business.
The High Court ruled that under what was known as the ’ancillary restraints’ argument, the MIF was ancillary to the main operation of Mastercard, which was pro-competitive.
This conclusion was surprising to lawyers as the court’s analysis of the ‘hypothetical world’ was, shall we say, unusual. In the ‘hypothetical world’ whilst the Mastercard MIF would have been lower, Visa’s rival MIF would not have been. The court declined to hold that the Mastercard and Visa schemes were materially identical, which would have been logical given the similarity between the schemes, and the practical likelihood that if Mastercard lowered its MIF, then so too would Visa have done.
In any event, the Sainsbury’s and Asda decisions reached opposite conclusions, with one decision for, and one against, retailers. It is now expected that firstly, Mastercard will seek permission from the High Court to appeal the decision in respect of Sainsbury’s, and that Asda and the other claimant high street retailers will do the same with regard to the 2017 decision. The appeals will define whether retailers see their claims come to fruition, and may well also include an analysis of the similar Visa scheme and whether it too was anti-competitive. The focus has, to date, been on the retail giants; the potential impact of a claim on smaller retailers, and particularly for our purposes, insolvent ones, has received little attention until now. That needs to change before time runs out to take action.
Some retailers that paid these interchange fees on transactions have, by now, become insolvent. Their claims therefore will be under the control of the office holder. There is a clear correlation here with the previous PPI litigation and swaps mis-selling claims: if the retailers are successful on appeal it will not be a question of if each retailer/office holder had a claim, but of how much the claim was worth. This should be of significant interest to office holders as it could be an unexpected realisation.
These potential claims are surprisingly broad in their remit; in addition to any business utilising a traditional card machine, they could potentially include forms of online payment where the Mastercard payment scheme applied, which widens the net to online businesses. Equally, a consideration of claims under the similar (but as yet untested by the courts) Visa payment scheme must be kept in mind.
The appeals will not be decided for a considerable amount of time – possibly 2020 if not later. However,office holders must not wait until the outcome of the appeals before considering their own claims. By the time the appeals are concluded, individual claims will have diminished in value and perhaps disappeared altogether.
These claims are governed by the usual principles of ‘limitation’, and so an office holder has just six years in which to bring a claim, from the date of the cause of action. In practical terms, when a claim is issued, you can claim for six years of MIF payments ending with the date you issue the claim. However, these claims were also curtailed by the Payment Card Interchange Fee Regulations on 9 December 2015, which marked a change in how interchange fees were charged. This has a pincer effect, meaning claims can be brought dating back six years from the date the claim was issued but the period covered by the claim must stop on 9 December 2015, the date on which the regulations came into force. As a result, the size of the claim window is constantly decreasing. For example, a claim issued on 9 December 2017 could see only four years of fees included (December 2011 to December 2015), and the longer an office holder waits, the smaller that window and therefore claim value, gets.
An office holder needs to consider whether there is a potential claim and if so what steps should be taken to advance that claim. Some solicitors are developing models to evaluate office holder claims, and utilising relationships with third party funders in order to provide insolvency practitioners with ways to protect their position, to enable them to bring a claim with minimal risk and cost to the estate. There is also the potential of claim assignment which would see a speedy realisation for the estate with minimal costs risk.
Until the appeals are decided, the landscape for these claims remains unclear. What is clear, however, is that office holders, and indeed all retailers affected by the litigation, currently have the very real possibility of a successful damages claim which will lose its value if no action is taken to protect the claim while the appeals are awaited.
A prudent office holder should look to identify all potential matters where they may have a claim, and take legal advice in order to ascertain its potential value. That advice should include establishing whether funding or claim assignment is viable, and/or desired. Only then can an office holder decide, in the interests of the creditors, if the claim should be protected, and how. The time spent in establishing at least the value of a claim is well worth it for what is a time limited opportunity to maximise realisations.
It should also be mentioned that while the focus of this article is on the possible realisations for office holders, these claims do apply equally to solvent businesses and could be pursued by any retailer wishing to protect its potential claim pending the outcome of the appeals.
This article was published in Recovery Magazine in December 2017.